Photo by Tom Brewster Photography for the Bureau of Land Management
The results of the Western Climate Initiative’s August auction were released today and all current and future vintage allowances sold at record-high allowance prices.
This news follows two other key climate updates from this summer: The release of the 2019 California Emissions Inventory which looks back at the state’s encouraging emissions progress, and the launch of the Climate Change Scoping Plan update process, which looks ahead at how the state will achieve its 2030 and 2045 targets. Taken together, all of these updates show that California has a golden opportunity to raise its climate ambition, as communities across the state grapple with intensifying, climate-fueled wildfires and drought.
First, let’s do the numbers
- All 71,261,536 current vintage allowances offered were sold; this is the fourth consecutive sold out auction.
- Current vintage allowances cleared at $23.30 — $5.59 above the floor price of $17.71 and $4.50 above the May 2021 settlement price of $18.80. This is both a record-high settlement price and the highest a settlement price has ever been above the price floor.
- All of the 8,306,250 future vintage allowances offered for sale sold, just as 100% sold in the previous three auctions. These allowances may not be used for compliance until 2024.
- Future vintage allowances sold at $23.69, $5.98 above the floor price of $17.71, and $4.65 above the $19.04 settlement price from May 2021. This result also sets a record for highest settlement price and a record for highest price above the floor price.
- In this auction, California raised just over $1.1 billion for the Greenhouse Gas Reduction Fund (GGRF). The GGRF supports initiatives such as the Clean Mobility Options program which develops clean transportation options, especially for communities historically overburdened by pollution.
- Quebec raised over $241 million USD (just over $300 million CAD) which supports climate investments in the province.
Allowance demand is WAY up
These record auction results could be driven by a combination of three factors. First, California’s economy is getting back to normal. While the Covid-19 health crisis is still ongoing, and certainly not everyone’s personal economy is strong, more Californians are on the road, energy use is increasing for the summer (and some zero-carbon hydroelectric sources could dry up), and demand is soaring for home construction. These changes each point to the potential for higher emissions, and thus the strong demand for more allowances.
At the same time, companies that are regulated by the cap-and-trade program know that there will be fewer allowances in the coming years because the emissions cap is declining more steeply than it did pre-2021, which could mean even higher allowance prices in the future. A steeper cap decline means that fewer allowances are issued each year, and thus fewer greenhouse gas emissions are allowed. This is why the level of the cap is the most important part of the cap-and-trade program – it ensures that emissions decrease each year.
Today’s record-high settlement prices could also reflect the significant amount of trading taking place recently in the secondary market. This is where entities buy and sell allowances outside of the quarterly auctions. There have been many new traders recently, which has helped increase the price at which allowances have exchanged in the secondary market. It is possible that this trend has spilled over and helped drive this quarter’s settlement prices to record-highs.
Greenhouse gas emissions continued to decline in 2019
The California Air Resources Board recently released the 2019 Greenhouse Gas Emissions Inventory, which showed that statewide climate pollution from transportation, electricity, industrial and other sources continues to decline. California met its 2020 greenhouse gas reduction goal four years ahead of schedule, in 2020, and the state was still below that limit in 2019. In fact, 2019 greenhouse gas emissions were the lowest since 2000, and 7.2 million tonnes (1.7%) lower than California’s 2018 emissions.
At the same time, California’s economy has continued to grow. From 2018 to 2019, California’s GDP grew 2.6%, while greenhouse gas emissions per unit of GDP decreased 4.1%. This represents an overall reduction in the carbon intensity of the state economy – we are producing more while emitting less. The same has been true overall since 2000, and demonstrates that limiting emissions and growing the economy can go hand-in-hand.
More insights from the inventory on selected sectors:
- Transportation emissions make up the largest segment of California’s greenhouse gas emissions inventory, almost 40%, and are among the most challenging to reduce. But the state is making progress here – reducing emissions by 3.5 million tonnes from 2018 to 2019, or approximately 2.1%.
- Industrial emissions are just over 20% of the state’s emissions inventory and have been somewhat stagnant over recent years. But from 2018 to 2019 that sector decreased by approximately 1 million tonnes, just over 1%, mostly from oil refineries and hydrogen production.
- Electricity emissions have also continued to decline as zero-carbon power generation displaces fossil fuel generation, reaching 48% of the state’s electricity supply in 2019. The electricity sector is still about 14% of California’s emissions inventory, and reduced its emissions almost 7% from 2018 to 2019.
- Commercial and residential building emissions from fuel combustion, which is just over 10% of the state’s emissions inventory, increased 2.5 million tonnes or almost 6% from 2018 to 2019 due to an uptick in natural gas use — underscoring the importance of accelerating building decarbonization in an affordable and reliable way.
Opportunity to increase climate ambition
This inventory makes clear that California’s suite of climate policies are successfully driving down emissions. Hitting our 2020 target ahead of time also means we have an opportunity — and an imperative — to increase the state’s climate ambition. One way the state can be more aggressive on climate is by making the economy-wide emissions limit or the ‘cap’ in the cap-and-trade program more stringent. Specifically, the current emissions limit is a straight line from our 2020 goal to the 2030 goal of achieving 40% reductions below the 1990 level. However, California is now below that 2020 goal for the third inventory year in a row — an achievement that means there is both an opportunity and a need to ramp up near-term ambition. The cap should be set based on actual emissions, calibrating the program to continue serving as an emissions backstop and minimize the total pollution we emit this decade — and the climate damages it could cause.
There are more reasons to tighten the emissions cap, but meeting our goal ahead of schedule is a golden opportunity to go faster and further on emissions cuts. Now is the time to consider such moves as CARB updates the Climate Change Scoping Plan and explores how we now meet the 2030 emission goal.
The climate impacts bearing down on California and our planet are a critical reminder that we can’t let up — we have to elevate our fight against the climate crisis this decade.